An American Perspective from China

Bubble in Shangri-La?

Last week, when I was traveling, Geoff Dyer had an excellent article in the Financial Times on the sustainability of China’s investment boom. It’s chock full of good data points and presents a very balanced view of the issue. Now that I’m back in Beijing, I wanted to highlight it and offer a little bit of additional perspective.

The article focuses on a town called Chenggong, on the outskirts of Kunming (the capital of Yunnan province), as an example of what may or may not be wasteful “overbuilding.” As is so often the case with stories “plucked from the middle of China,” it can be hard for readers who aren’t overly familiar with the place and context to fit this snapshot within a larger picture of China. To what extent is Chenggong an outlier, or typical of trends seen elsewhere? It so happens that I’ve spent some time in Chenggong, so I might be able to help out a little here.

Yunnan province lies in the far southwest of China, along its mountainous border with Myanmar (Burma), Laos, and Vietnam. It’s part of the region I call (in my Atlantic article on “The Nine Nations of China”) Shangri-La. Its rugged landscape is known for its scenic beauty, unspoiled climate, and rich biodiversity. But Shangri-La is also the poorest region of China, due to its treacherous terrain and limited infrastructure. Minority hill tribes account for about 1/3 of the region’s population. Although Kunming and its suburbs (including Chenggong) are almost entirely settled by Han Chinese, they retain a somewhat remote and exotic air.

Chenggong itself was, until recently, a largely rural county located just to the southeast of Kunming, along the eastern shore of a large lake. At an elevation of 2,000 meters (more than a mile high), just a few miles north of the tropics, the climate tends to be clear and mild. This pleasant climate accounts for the two things for which Chenggong is famous, which the FT article didn’t mention. First, it is home to a year-round training center for China’s Olympic athletes. Second, Chenggong is focal point of a rapidly growing trade in cut flowers, which are cultivated by local farmers and exported all across Asia. Dubbed “Holland in Asia,” the town hosts a formal auction floor modeled on the Dutch flower exchange in Aalsmeer, with nearly a million stems changing hands every day. It was a visit to this flower market that brought me to Chenggong a little over a year ago.

With this backdrop in mind, it’s possible to evaluate the true takeaways from last week’s FT article.

On the negative side, one of the things that most struck me was the account of empty residential units and the stockpiling of multiple units by speculators, a phenomenon I’ve pointed to many times before, and which formed the basis for one of Goeff’s earlier columns. A sidebar to the main article relates:

At one of the town’s many estate agents, a Mr Xin is eyeing up new apartments . . . he already owns eight flats at a compound called Huilan Yuan, which had in theory been set aside for civil servants moving to the town, but he is interested in more. “I think it is a good idea to invest now before the property prices in Chenggong start to rocket,” says Mr Xin.

Many real estate “bulls” in China will admit that stockpiling exists, but contend it is restricted to Beijing and Shanghai, which serve as magnets for wealth from all over the country. In second and third-tier cities, they argue, people are buying places to live, and the growth is sustainable. Putting statistics aside, just on the basis of what I’ve observed traveling around China, I’ve always been reluctant to credit this argument. I’ve seen plenty of places in the provinces, in second, third, or even fourth-tier cities like Ordos (in Inner Mongolia) and now Chenggong (in the remote southwest) where people — for better or worse — appear to be investing in residential real estate, not to live in, but as a store of wealth. If there’s an overhang in the residential real estate sector, it is happening across China, and is not confined to Beijing and Shanghai.

On the other hand, the article also highlighted several infrastructure projects in the area that I see as far more productive:

. . . a high-speed rail line will connect Kunming to Shanghai, nearly 2,000km away, and help bind this once isolated region more closely into the national economy . . . The investment boom is also intended to reorient the region’s economy, which has long focused on China’s richer east coast, towards its south-east Asian neighbours. The construction of a bridge has completed a road linking Kunming to Bangkok, while a bridge on another road joining Yunnan with northern Vietnam is nearly finished. Road and rail links to the border with Burma are also being improved and a Rmb23bn airport is under development, with the aim of making Kunming a hub for tourism in south-east Asia.

As I’ve said before, there are parts of China were expanded infrastructure is desperately needed, and other parts that are grossly overbuilt. This is one region where it is desperately needed. One of the main reasons Shangri-La is the poorest of China’s “nine nations” is its inaccessible terrain and lack of links with the outside world. In the past few years, crossborder trade with ASEAN has been booming, and improved road and rail links will only help. And upgrading Kunming’s airport will not only bring in more tourists (to what is already a thriving tourist hub), but could help overnight shipments of Chenggong’s cut flowers reach wider markets all over the world.

The point is, it’s hard to generalize about China’s investment boom. The bulls and bears cited in the article are both correct, in a sense, and who is more correct depends on where in China you’re looking at. Is there a bubble in Shangri-La? In housing, there are worrying signs that the frothy exuberance that might make more sense in Beijing or Shanghai can be found in more remote corners of China. In infrastructure, the same kind of projects that might transform a place like Kunming or Chenggong, by connecting them to rapidly growing markets for what they already have to offer, could be monuments to pointless excess somewhere else. What I worry, though, given that investment made up 50% of GDP last year, is that there are plenty of such “monuments” being built where they make no sense, just to hit growth targets. As Bill Adams of the Conference Board is quoted in the article as saying, “There is so little transparency, so little visibility – that is what is worrying about the investment boom.”

It’s not a simple picture — but then, China’s not a simple country. That’s one reason I find the “Nine Nations of China” framework useful in drilling down to the truth.

First, I totally disagree with you analysis in the Atlantic piece, but that is something to get into in more detail in another forum. Second, there is a high level of residential real estate speculation in areas even more remote than Kunming (Chenggong is really just Kunming). I observer this in the outrageous prices for Rulli real estate that I noted during the last couple of years there. I would have to check my notes for the details but on a trip there during the last year or two I noted how there Sq meter prices were not all that much lower than Beijing at the time. It struck me as total mad given the difference in location. Third, as I have mentioned here before, any and all infrastructure improvements that rely in any way on Myanmar (road, rail, river links and even the pipelines) need to be viewed with caution. They might well not come about. Or if they are completed it might not be for 20 years. Myanmar is not China and the tensions in Shan and Kachin states have been on the rise as the Tatmadaw tried to impose its border guard force proposal on the ceasefire groups. As I write we are already pst the 3rd deadline an the UWSP has just made a formal request for yet another extension. No doubt a resumption of hostilities across the border would have a large effect on the property market in Ruili too.

Interested to talk with you at some point.
I’ve looked a bit at Chinese construction and infrastructure but a world apart from living in the midst of it.
Also wonder whether you’ve any instinct if/where a secondary FAI wave may locate.

As you point out, it is easy to cite boondoggle after boondoggle in China. My recent favorite is the mixed use skyscraper being built Hua Xi in Jiangsu province. 8th tallest building in the world! In a village of 30,000 people. Granted the people are rich from a legacy of local cooperatively owned companies, but come on, Hua Xi is hardly a financial center. But they now plan to build the world’s second tallest building, price tag 6 billion RMB. Public officials seem to be unconcerned because the community has public revenues to cover the cost/debt service. Since when does having the money to spend make it a good investment? Burning a hole in the pocket?

Noting also the various articles lately about the wisdom of the high speed rail investments. One article says that the original annual passenger traffic estimate for the Tianjin to Beijing line was 38 million while the annualized figure thus far is running at 18 million. Would love to see capital costs and operating expenses but alas, as Bill Adams points out, transparency is hard to come by.

I am less worried about a melt down in residential real estate because I believe these investments are less leveraged, financed more by savings of successful Chinese looking for a store of value. Commercial real estate in China, however, is very scary. Cap rates are ridiculously low, lease up times are multiples of that in the west and the proportion of debt financing I presume is much higher in this space.

It looks like Ordos has become everyone favorite example of China property market excesses. Every doomsayer will invariably invoke Ordos as the living proof that China is heading down toward disaster if not total collapse, just like every foreign reporter coming to China to dig out human rights abuses they almost always quote Ai Weiwei.

>>a high-speed rail line will connect Kunming to Shanghai, nearly 2,000km away, and help bind this once isolated region more closely into the national economy

this stuff to me sounds exactly like waste. 2,000 km say you travel at 200km/h, takes you 10 hours. who will take that high-speed-little-point train??? take a plane, 4 hours and you’re there. and who are supposed to take that train, flower growers? remember, when the japanese started to develop shinkansen in the 60s, Tokyo-Nagoya-Osaka became a massive success. Then they added Tokyo-Aomori and other less than stellar routes to “connect” all of the Japan, and that eventually bankrupted JR so that the govt had to bail them (these loans are still being paid off 30 years later). Beijing-Tianjin? Great idea. Beijing-Shangai (about 1000km)…err, maybe (5hrs vs 2-3 by plane). Shanghai-Kunming? Albatross.

Hello,
Thanks for the post and commentary, it has helped greatly in researching a photo essay I am putting together about property market excesses here in China. I have Ordos (Kangbashi new town), Chenggong, south china mall, the skyscraper in Hua Xi and summer cabins in Heilongjiang as possible starting points.
Any other locations/ideas most appreciated!
Best,
Mike

another trick: type in the huaxi city, and you will get an entirely different place in china (guizhou, one of the poorest provinces in china) with plans to build sky scrapers surrounded by rice paddies.

The Shanghai-Kunming line is one of the corridors of the national 4 x 4 HSR grid that China has planned. It’s not just connecting Kunming to Shanghai. There are one municipality (Shanghai) and five provincial capitals along this corridor: Shanghai, Hangzhou, Nanchang, Changsha, Guizhou and Kunming. These are all multi-million metropolis. There are also other smaller cities and numerous counties. In addition, this line also intersects with other corridors: with Beijing-Shanghai line and Southeast Coastal line at Shanghai, with Beijing-Hong Kong at Changhsha, with Chengdu-Guizhou-Guangzhou at Guizhou.

This segment between Shanghai and Changsha will be constructed first; the Changsha-Kunming segment is not expected to be completed in 2015 at the earliest.

@greg: metropolises on the way are a must, but e.g. changsha to guizhou is still about 600km in what is less than forgiving landscape. then guizhou and yunnan are the two poorest provinces in china (ex-tibet and xinjiang). are these really justified?
and re “intersections”, do u think smb will take a train fom beijing to shanghai, then from shanghai to changsha and then to hong kong? i understand densities in china and US are completely different, and A LOT of china’s bullet train network makes sense, but what they are doing with yunnan is not materially different from building a line from NYC to Dallas.

It is justified, in my opinion. It would take many pages to discuss the whole economics of HSRs, but my point is that you should not think about the 2000 km line as just Shanghai to Kunming, which would have made no sense at all.

You could counterargue by using some extreme examples like why should anyone go to Kunming from Beijing via Shanghai just because there is intersection at Shanghai. Or you could go even further to pose the question why would anyone from Harbin up in the north to take the train to Kunming via Beijing just because whole network allows it. I think you are smart enough to understand my point without resorting such extreme arguments.

The bottom line: China would build a national HSR network that serves almost all the provincial capitals. Some lines would be more profitable than others; some, in the western region, might not be profitable at all in the short term. In that case, they would be subsidized from freight revenue or from the more profitable routes in the Eastern routes. In a way, this is a national universal service you’ll have cross-subsidies.

If you’re looking for unprofitable examples, I can provide you with two: one is the Qinghai-Tibet line which is operational now; the other is the Lanzhou-Xingjiang line which is under construction. The latter is a 1,700 km line of the 350 kmh class. I can guarantee you that Chinese government is going to lose money on this money. And the reason is not because people are stupid in China.

>>I forgot to mention that the Shanghai-Kunming line is 350 kmh, so the average travel speed will be above 300 kmh. Shanghai to Kunming will be about 6 – 7 hours.

maximum speed outside of maglev in china (also holds record for the world) is a >fragment< of shanghai-tianjin, that reaches 350km. otherwise shanghai tianjin is 120km in half an hour, or about 240km/h. you are mixing the top speed with the average.

I did mention that the (maximum) design speed is 350 kmh; the average travel speed will be below that due to stops. Currently on Guangzhou to Wuhan line, which is about 960 km, the non-stop service runs just under 3 hours. So the average travel speed is 320 kmh. In that case, it takes 6 – 7 hours to cover 2000 km.

I think you’re talking about Beijing-Tianjin line, which is 120 km. In such a short distance, it is of course impossible to maintain the maximum speed for long. But in the case of Shanghai – Kunming, it’s more similar to Guangzhou-Wuhan line.

@greg – only time will tell eventually, but i think just like with the connections to tibet and xinjiang, what they are doing is essentially the same thing – since extensions from yunnan to myanmar/vietnam, thailand, malaysia onward to singapore are already in discussion. some of these countries will have to even change the railtrack standard. you have to be blind not to see that what drives these decisions are geopolitical/military in their nature. asia is getting divvied up, and china wants to push as far as it can vis-a-vis india in this case.

Hi there! Thank you for that post. Brilliant just brilliant. And interesting comments.

I am actually curating a project in London for Ai Weiwei’s capture-awareness and release. It is called The Chinese Whisper Project (Chinesewhisperproject.worpress), and I am looking to do an exhibition using art as a symbol of unique interpretation and freedom of expression. Hopefully I’ll have 25 peices of art to exhibit from 5 unique artists. You’d be so welcome to come! I guess it’s about pulling together and standing for our rights. Especially in an age of social media power. I’ve put a project video plan up on the blog and on youtube too – it would be great if you could find an outlet to let readers know.

Many thanks! Keep up the good work.

p.s. i’m on twitter: ChineseTwhisper
p.p.s. I’ve added your blog to my links on the site